2025 (10) TMI 993 - AT - Income Tax

Trust allowed deduction under section 11(1)(a) for foreign institute fees and related forex loss for education

ITAT CHENNAI - AT allowed the trust's claim under section 11(1)(a), holding payments to a foreign institute for examination, licence and exemption fees ... Denial of exemption u/s 11 - disallowance made by AO on the ground that payments made to the Institute of Chartered Shipbrokers (ICS), London, for examination fees, license fees and exemption fees do not constitute an “application of income in India” within the meaning of Section 11 - disallowance of claim of foreign exchange loss incurred on transactions integral to the educational activities of the trust, claim for carry forward under Explanation (2) to Section 11(1) -assessee is registered as a public charitable trust u/s 12AA HELD THAT:- It is undisputed that the Assessee Society is engaged in imparting education in the field of shipping and logistics and that the materials and services sourced from ICS, London, are used exclusively for Indian students in India. The books constitute tangible assets brought into India, while the examination and exemption fees facilitate the award of internationally recognised qualifications to Indian students. The benefit both tangible and intangible, clearly accrues within India. The reliance placed by the AO on the decision in NASSCOM [2012 (5) TMI 204 - DELHI HIGH COURT] is misplaced, as that case dealt with payments made for activities conducted abroad. In contrast, the present case involves educational activities fully carried out in India. The payments in question are integral to achieving the educational objectives of the Assessee Society and are, therefore, distinguishable on facts and legal grounds. We also note that the coordinate bench of the Tribunal, in earlier proceedings u/s. 12AA (as referred supra) involving the same Assessee, has already held that the Society’s activities qualify as “education” within the meaning of Section 2(15). That ruling has not been reversed by any higher forum and continues to be binding. Thus, payments made to ICS, London including for examination and exemption fees and licence fees are in furtherance of the charitable purpose of education, and constitute valid application of income within India u/s 11(1)(a) of the Act. Accordingly, we find that the AO erred in disallowing the said expenditure, and we direct that the disallowance be deleted. In the result, the ground of the Assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether payments remitted to a foreign parent/institute (for purchase of books, examination fees, exemption fees and licence fees) qualify as 'application of income in India' within the meaning of Section 11(1)(a) read with the definition of charitable purpose under Section 2(15), so as to attract exemption for a registered educational trust. 2. Whether foreign exchange loss arising on transactions integral to the educational activities of the trust is an allowable application of income, and whether such loss (where not claimed in the original year) can be carried forward/considered under Explanation (2) to Section 11(1). ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of payments to a foreign institute as 'application of income in India' under Section 11(1)(a) Legal framework - Section 11(1)(a) permits exemption where income is applied to charitable/religious purposes 'in India'. Section 2(15) defines 'charitable purpose' to include advancement of education. - Registration under Section 12AA confirms charitable character for purposes of exemption, subject to application-of-income tests. Precedent treatment (followed/distinguished) - The Tribunal relied on a prior coordinate-bench decision concerning the same assessee which held the institute to be an Indian educational institution (not an agent/branch) and sustained registration under Section 12AA. - A High Court decision concerning an educational institution with affiliation to a foreign body was applied as analogous on facts and relied upon to support the proposition that affiliated international recognition does not convert the Indian entity into a foreign agent. - A High Court decision (construing payments for activities conducted abroad) relied upon by the revenue was distinguished on facts as involving events/activities outside India and thus not comparable to payments that facilitate education conducted wholly in India. Interpretation and reasoning - The Court examined the substance and end-use of the remittances rather than their mere geographic routing. Payments were held to be made for (i) books physically imported and used exclusively in India by Indian students (tangible assets brought into India); (ii) examinations and exemption fees where examinations are conducted in India and fees collected from Indian students are passed on without profit; and (iii) a licence for a distance-learning centre that enables delivery of education within India. - The Tribunal reasoned that these payments are integrally linked to the educational activity conducted in India and result in both tangible (books) and intangible (professional qualification, skills) benefits that accrue within India. - The relationship between the Indian institute and the foreign parent was characterised as academic affiliation/collaboration (analogous to international university affiliations), not as a commercial agency or branch wherein income is effectively applied outside India for foreign benefit. No evidence of profit-sharing or commercial exploitation by the foreign body was found. - Distinguishing precedent: the decision adverse to the assessee addressed payments for events/activities abroad where benefit did not accrue in India; that factual distinction was determinative of applicability. Ratio vs. Obiter - Ratio: Payments that are made to a foreign body but used to procure tangible educational materials brought into India, to enable examinations conducted in India, or to license educational activities in India, constitute 'application of income in India' if the real benefit (tangible or intangible) accrues within India and the payments are in furtherance of the charitable object of advancement of education. - Obiter: Observations regarding modern global educational affiliations and general commentary on international academic cooperation as non-commercial were supportive reasoning but not separate legal propositions beyond the facts. Conclusions - The Tribunal held that remittances for books, examination and exemption fees and licence fees to the foreign institute qualify as application of income in India under Section 11(1)(a) insofar as they are integral to and exclusively for educational activities conducted in India and confer benefit within India. - The Assessing Officer's disallowance of these payments was set aside and the claims allowed. Issue 2: Allowability of foreign exchange loss integral to educational activities and carry forward under Explanation (2) to Section 11(1) Legal framework - Section 11 permits exemption where income is applied to charitable purposes in India; Explanation (2) to Section 11(1) deals with carry forward/aggregation issues for application of income where timing or year-wise treatment arises. Precedent treatment (followed/distinguished) - The Tribunal proceeded on the premise that, having held the underlying payments to be allowable applications of income in India, ancillary losses (including foreign exchange loss) arising on those transactions are also integral to the educational activities and thus allowable. - For carry-forward treatment where a claim was not made in the original year, the Tribunal directed the Assessing Officer to consider such claim in light of a jurisdictional High Court authority that permits appropriate carry-forward/consideration (the Tribunal invoked binding High Court guidance without naming it in these headnotes). Interpretation and reasoning - Since the primary remittances were held to qualify as applications of income in India, resultant exchange losses incurred in relation to those transactions are logical and necessary incidentals to the educational expenditure and therefore allowable as application of income. - Where a carry-over to the next year arises (or was not originally claimed), the Tribunal instructed that the Assessing Officer should verify the factual correctness of the carry-forward claim and consider it in accordance with the applicable High Court precedent governing carry-forward in charitable trust contexts. Ratio vs. Obiter - Ratio: Ancillary foreign exchange losses arising from transactions that are themselves validated as applications of income in India are allowable; procedural omissions in claiming carry forward are movable for consideration if permitted by controlling High Court authority and on verification of facts. - Obiter: Directions on administrative verification and the mechanics of AO's re-examination of carry-forward claims were procedural guidance rather than novel legal ratios. Conclusions - The Tribunal allowed the foreign exchange loss as an allowable application of income, being integral to educational activities previously held allowable. - The carry-forward claim was remitted to the Assessing Officer for factual verification and consideration; where not originally claimed, the AO was directed to entertain the claim consistent with the controlling High Court precedent. Inter-issue cross-reference - The allowability of the foreign exchange loss and the direction on carry-forward are contingent upon and flow from the primary conclusion that payments to the foreign institute are applications of income in India; hence the conclusions on Issue 2 are expressly dependent on the ruling under Issue 1. Disposition - The Tribunal allowed the appeals on the above grounds, deleted the disallowance made by the AO relating to payments to the foreign institute, allowed the related foreign exchange loss, and directed verification/consideration of carry-forward claims in accordance with applicable High Court authority.